Goldman Sachs: Shutdown Could Shave Q4 GDP by 0.5%

Current consensus GDP estimates for Q4 sit at about 2.5%. That’s not bad considering the fact that the economy is still crawling out of the credit crisis hole. But as the shutdown drags on we’re beginning to see more and more meaningful signs that this is dragging down economic growth. According to Goldman the shutdown should hurt Q4 GDP by about 0.5% which brings their estimate down to 2%. This isn’t a huge deal yet and I presume the Goldman estimate doesn’t account for potential back pay which most furloughed employees should get, but as this drags on longer and longer it will start to have a real meaningful impact on confidence and growth.

I am sort of at a lost for words at this point. If I don’t meet important deadlines then I get fired by my clients. I am sure your work is the same. Instead, when Congress can’t do their job they continue to get paid and the rest of us have to undergo the self inflicted pain. Here are the details on the Goldman view (via ZH):

“From October 1-4, we believe the shutdown probably reduced federal compensation by roughly $400mn per day. We would expect the non-compensation aspects of the initial stage of the shutdown to have been very modest. Overall, the first four business days of the shutdown probably reduced growth by 0.16pp.

The shutdown has now lasted a second week, but the incremental effect should be smaller. The Department of Defense has brought most of its employees back to work, leaving 450k federal employees still out of work, and thus reducing the effect on federal compensation to $225mn per day. We would expect a small reduction in services-related consumption as well. After the second week of shutdown, we believe the cumulative reduction in Q4 real GDP growth amounts to 0.28pp (Exhibit 2).

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If a longer-term resolution can be reached over the coming days, we would expect the downside risk from the fiscal debate to be limited to about 0.5pp in Q4, compared to our current growth forecast of 2.5%.”